Microchip Technology (MCHP)

Analog chipmaker Microchip Technology (NASDAQ:MCHP) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 26.8% year on year to $970.5 million. On top of that, next quarter’s revenue guidance ($1.05 billion at the midpoint) was surprisingly good and 5.1% above what analysts were expecting. Its non-GAAP profit of $0.11 per share was in line with analysts’ consensus estimates.

Company Overview

Spun out from General Instrument in 1987, Microchip Technology (NASDAQ: MCHP) is a leading provider of microcontrollers and integrated circuits used mainly in the automotive world, especially in electric vehicles and their charging devices.

Microchips’ peers and competitors include Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), and Infineon (XTRA:IFX), among others.

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Microchip Technology struggled to consistently generate demand over the last five years as its sales dropped at a 3.6% annual rate. This wasn’t a great result and suggests it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Microchip Technology’s recent performance shows its demand remained suppressed as its revenue has declined by 27.8% annually over the last two years.

This quarter, Microchip Technology’s revenue fell by 26.8% year on year to $970.5 million but beat Wall Street’s estimates by 1%. Despite the beat, the drop in sales could mean that the current downcycle is deepening. Company management is currently guiding for a 15.8% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 2.5% over the next 12 months. Although this projection is better than its two-year trend, it's tough to feel optimistic about a company facing demand difficulties.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Microchip Technology’s DIO came in at 251, which is 88 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Microchip Technology’s gross margin is one of the best in the semiconductor sector, and its strong pricing power is a direct result of its differentiated products and technological expertise. As you can see below, it averaged an elite 62% gross margin over the last two years. That means Microchip Technology only paid its suppliers $37.99 for every $100 in revenue.

In Q1, Microchip Technology produced a 51.6% gross profit margin, marking a 7.9 percentage point decrease from 59.6% in the same quarter last year. Microchip Technology’s full-year margin has also been trending down over the past 12 months, decreasing by 9.4 percentage points. If this move continues, it could suggest deteriorating pricing power and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Microchip Technology has been an efficient company over the last two years. It was one of the more profitable businesses in the semiconductor sector, boasting an average operating margin of 23.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Microchip Technology’s operating margin decreased by 11.6 percentage points over the last five years. Even though its historical margin was healthy, shareholders will want to see Microchip Technology become more profitable in the future.

In Q1, Microchip Technology generated an operating profit margin of negative 10.3%, down 29.5 percentage points year on year. Since Microchip Technology’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Microchip Technology, its EPS declined by 14.2% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Diving into the nuances of Microchip Technology’s earnings can give us a better understanding of its performance. As we mentioned earlier, Microchip Technology’s operating margin declined by 11.6 percentage points over the last five years. Its share count also grew by 4.6%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

In Q1, Microchip Technology reported EPS at $0.11, down from $0.57 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 5.3%. Over the next 12 months, Wall Street expects Microchip Technology’s full-year EPS of $1.30 to shrink by 13.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Microchip Technology has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging 28.1% over the last two years.

Taking a step back, we can see that Microchip Technology’s margin dropped by 16 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity.

Microchip Technology’s free cash flow clocked in at $191.7 million in Q1, equivalent to a 19.8% margin. The company’s cash profitability regressed as it was 9.7 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Microchip Technology historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.7%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Microchip Technology reported $771.7 million of cash and $5.63 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.33 billion of EBITDA over the last 12 months, we view Microchip Technology’s 3.7× net-debt-to-EBITDA ratio as safe. We also see its $183.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see Microchip Technology’s revenue guidance for next quarter top analysts’ expectations. We were also glad its EPS outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 6.8% to $52.47 immediately after reporting.

Updated: May 15, 2025 at 10:18 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Microchip Technology, you should also grasp the company’s longer-term business quality and valuation.

We see the value of companies furthering technological innovation, but in the case of Microchip Technology, we’re out. To begin with, its revenue has declined over the last five years. And while its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its declining operating margin shows the business has become less efficient. On top of that, its cash profitability fell over the last five years.

Microchip Technology’s P/E ratio based on the next 12 months is 53.9x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $63.34 on the company (compared to the current share price of $61).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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